The U.S. dollar is trading lower this morning ahead of the Beige Book report, which will most likely show that the recovery is losing steam. Consumer spending has been lackluster while unemployment remains high and so far we have seen no meaningful improvements. There is a 90 percent chance that the Beige Book report will confirm everyone's fears that the U.S. recovery has hit a brick wall and this possibility has encouraged traders to sell dollars once again. However in all likelihood we believe that the release of the Beige Book will be a nonevent for the currency market, leading to little reaction in the U.S. dollar.
In our daily report yesterday we said that special attention needs to paid to the comments made by Federal Reserve Governor Duke last night because she has been on fence about additional Quantitative Easing. Based upon her speech, it appears that she is more likely to oppose than support an increase in the asset purchase program. Duke expressed skepticism about the effectiveness of large scale asset purchases in communicating their actions, intensions and reasoning to the public and added that the November decision is not a done deal. According to Duke, "a lot can change between now and the next FOMC meeting." An alternative that Duke proposes is to lower the interest rate on excess reserves but even this policy option may not be all that effective.
UK MPC Vote Split 3 Ways
Meanwhile even though the British pound has also recovered against the U.S. dollar, the rally is mild compared to other currencies. The reason is because the Bank of England minutes showed the central bank more willing to consider increasing stimulus in the coming months. The Monetary Policy Committee voted 7-1-1 with the majority favoring no change, Sentance continuing to vote for a rate hike and Posen advocating a GBP50 billion increase in Quantitative Easing. Although this split is not surprising after Posen shared his dovish views, what pressured the pound was the revelation that some MPC officials felt the chances for more stimulus has increased in recent months. With inflation still very high, we believe that it will be difficult for the BoE to justify more action before the end of the year. However as soon as inflation starts to fall consistently, the central bank will waste no time getting to work on stimulating the economy.
Finally we have seen a nice recovery in the euro following stronger than expected producer prices in Germany. ECB member Stark also said last night that the central bank could raise interest rates before scrapping all non standard liquidity measures. There appears to be a great deal of dissent within the European Central Bank and surprisingly, they are making their debates public. However unlike the U.K. and the U.S., central bank officials in the Eurozone are growing more hawkish and not dovish which will support the currency.
Aside from the Beige Book report scheduled for release this afternoon, we also have a number of central bank officials slated to speak and their comments could lead to some intraday volatility in the currency market.
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